I’m taking down notes for Sam Altman’s class, How to Start a Startup and I figured I’d start sharing them. This is for the fifteenth lecture with the following notes:

How to Manage

One Management Concept

When making a critical decision, you must understand how it will be interpreted from each person’s point of view and its impact on the union of the individual views (i.e. culture).

Demotions

As a founder/CEO

It’s tough to fire someone who has put in a big effort.

A demotion is a “have your cake and eat it too” scenario.

Win-win

No cultural backlash.

As an executive

May not want the demotion, but it gives them an option.

It’s better than being fired.

Easier to explain to a new employer.

Enables them to keep growing with the company even though they’re demoted.

For everyone else

Does he keep his same equity package?

Is he going to work as hard being the guy who reports to that guy?

Do I have any respect for him now that he’s been demoted?

Raises

Excellent employee asks for a raise

As a founder/CEO

You want to retain them.

They have done great work, so it’s “fair”.

They will like you if you give them the raise and you want to be liked.

Other employees

Unfair that I didn’t get a raise.

I did better work, so doubly unfair.

Maybe that means, you’re not evaluating people on their performance. You’re giving the raise to the first person that asks.

Maybe I should quit.

Cultural Conclusion:

Every employee has a fiduciary responsibility to heir family to ask for a raise all the time.

Right Answer

You have to be formal about the performance evaluation process.

You can’t say, we want it to be organic and a natural experience.

All the right inputs.

Run as frequently as needed.

No raises outside of the process.

You can’t give raises when asked.

Makes the employees feel they are getting a fair chance.

They don’t have to play golf with you in order to get a raise.

Evaluating a Sam Altman blog post

“Most employees only have 90 days after they leave a job to exercise their options. Unfortunately, this requires money to cover the strike price and the tax bill due for the year of exercise (which is calculated on the difference between the strike and the current FMV). This is often more cash than an employee has, and so the employee often has to choose between walking away from vested options he or she can’t afford to exercise, or being locked into staying at the company. It’s a particularly bad situation when an employee gets terminated.

This doesn’t seem fair. The best solution I have heard is from Adam D’Angelo at Quora. The idea is to grant options that are exercisable for 10 years from the grant date, which should cover nearly all cases (i.e. the company will probably either go public, get acquired, or die in that time frame, and so either the employee will have the liquidity to exercise or it won’t matter.) There are some tricky issues around this-for example, the options will automatically convert from ISOs to NSOs 3 months after employment terminates (if applicable) but it’s still far better than just losing the assets. I think this is a policy all startups should adopt.“ -sama

Is Sam right?

How stock option package works in startups:

You get stock that vests over a period of time.

When you leave the company, you have 90 days to buy your stock options before it’s gone.

This has been a “rule” since the 80s.

History:

Your perspective

Want to be fair.

Don’t want employees to stay who don’t want to be there, but feel handcuffed.

Want to reward people who stay.

Perspective of the employee who leaves

I worked for my shares; I shouldn’t be prevented from getting them due to economics.

Did you tell me the truth when you hired me? If you didn’t, I’ll make sure that everyone knows that.

If I was fired, I just got screwed a second time.

Perspective of the employees who stays

Is it smarter for me to stay or leave?

Your employees know each other better, than they know you.

Should I have left too?

How does that compare to my deal?

Are my colleagues being treated fairly?

Does my loyalty matter?

Situation Analysis

Companies lose employees in Slicon Valley at around 10% per year.

SV companies dilute at 6-8% per year when they are private for employee group.

If an employee doesn’t exercise their stock during the exercise period, it goes back into the pool where it can be reissued to new or existing employees.

Losing all your stock is a big financial incentive to stay.

A 10 year option on a highly volatile security is quite valuable.

When the employee goes to the new company, she gets the new company stock plus the 10 year option.

The employee who stays gets the option only.

Two Alternative Cultural Statements

We treat new employees with the utmost straight-forwardness and fairness and we will therefore give you 10 years to exercise your stock if you quit or are fired.

We’ll tell you up front: you are guaranteed to get your salary. For your stock to be meaningful, you must either:

Vest

Stay until we exit or have the cash to exercise

Make the company worth something (10% of nothing is nothing)

We do this because we massively value those who see it through and will minimize the dilutive cost of those who leave.